Tightening by the mightily bloated Federal Reserve is off and running.
The Fed’s Open Market Committee kept its word the other day, with the first of what’s expected to be 6 or 7 quarter-of-a-percentage point interest rate increases by the end of the year to put inflation in its place.
Today, Fed Governor Christopher Waller warned that the Fed may need to enact one or more 50 basis point hikes in 2021.
Though he voted this week for just 25 basis point because of economic uncertainty over Russia’s invasion of Ukraine, Waller said he thinks the Fed may need to be more aggressive soon.
“I really favor front-loading our rate hikes, that we need to do more withdrawal of accommodation now if we want to have an impact on inflation later this year and next year.”
“The way to front-load it is to pull some rate hikes forward, which would imply 50 basis points at one or multiple meetings in the near future.”
In addition to the rate hikes, Waller said he thinks the Fed needs to start reducing its holdings of Treasuries and mortgage-backed securities sooner than later.
By Dave Allen for Discount Gold & Silver
Tightening by the mightily bloated Federal Reserve is off and running.
The Fed’s Open Market Committee kept its word the other day, with the first of what’s expected to be 6 or 7 quarter-of-a-percentage point interest rate increases by the end of the year to put inflation in its place.
Today, Fed Governor Christopher Waller warned that the Fed may need to enact one or more 50 basis point hikes in 2021.
Though he voted this week for just 25 basis point because of economic uncertainty over Russia’s invasion of Ukraine, Waller said he thinks the Fed may need to be more aggressive soon.
“I really favor front-loading our rate hikes, that we need to do more withdrawal of accommodation now if we want to have an impact on inflation later this year and next year.”
“The way to front-load it is to pull some rate hikes forward, which would imply 50 basis points at one or multiple meetings in the near future.”
In addition to the rate hikes, Waller said he thinks the Fed needs to start reducing its holdings of Treasuries and mortgage-backed securities sooner than later.
The Fed balance sheet has ballooned to over $9 trillion, and officials are preparing the process to start rolling off some of their holdings soon. Waller said that process should start by the FOMC’s May meeting.
“We’re in a different place than we were before,” he noted. “We have a much bigger balance sheet, the economy’s in a much different position. Inflation is raging.
“So, we’re in a position where we could actually draw down a large amount of liquidity out of the system without really doing much damage.”
Waller’s comments came less than two hours after one of his colleagues, St. Louis Fed Prez James Bullard, said the Fed should raise rates at least 300 basis points (3 percentage points) this year.
Bullard was the only Fed policymaker this week to vote against the quarter-point increase, arguing that the Fed should have raised a half a point to stymie inflation running at 40-year highs.
Waller says, “The data’s basically screaming at us to go 50, but the geopolitical events were telling you to go forward with caution.
“So those two factors combined pushed me off of advocating for a 50-basis point hike and supporting the 25-point hike that we enacted.”
The full FOMC also pointed to rate hikes that would push the benchmark Fed Funds rate, which banks charge each other for overnight lending, to 1.75% by year’s end.
Gas Up, Down and All Around
Although gas pump prices have been a big driver of persistently high inflation, drivers across the country welcomed some relief this week, with average prices falling by 12 cents from the prior week.
But the surging costs remain a hit to many people's wallets. The average price for regular gas yesterday was $4.37, according to AAA.
Although it seems gas prices have topped off, current prices are still $1.32 more than this time last year.
The Labor Department says inflation has now breached 8%, and energy prices were already a significant part of that. But the early days of Putin’s war sent crude oil prices soaring, and in turn, gas prices shot up nationwide.
Oil prices dropped 30% last week, but it's taking a longer time for consumer prices to follow suit.
For now, most economists agree that inflation is highly regressive, falling hardest on low-income people.
University of Pennsylvania professor Susan Wachter says it's not uncommon for people to choose longer commutes to find cheaper housing outside of the city.
"But now,” she adds, “they're exposed to higher costs of transportation through higher prices at the gas station.”
People with low incomes appear to be relying more on credit cards rather than debit cards when purchasing gas, a possible sign of financial stress.
Gas makes up a large portion of total spending for lower income consumers, many of whom are employed in sectors with less options for working at home.
Time will tell whether gas prices will lead more people to opt for public transit or more fuel-efficient cars in the long term.
The Southeastern Pennsylvania Transportation Authority has used soaring costs as an advertisement opportunity, offering a 25% discount on weekly passes through the end of this month.
Market Manipulators Turn Attention to Oil
Kate Marino reports today that as oil prices have soared over the last few months, short sellers have been focusing on energy companies.
Changes in the percentage of short interest in energy companies largely tracked with shorts of all S&P 500 companies for much of last year.
That changed around January when U.S. oil prices pushed into the $80s — and energy stocks outperformed, logging a 33% year-to-date rise through mid-March compared to the S&P's 12% decline.
Enter the market manipulators, and energy shorts shot up, leaving the S&P average in the dust.
And now, it looks like the short sellers are speculating that the days of $100+ oil will soon be a thing of the past. Whether their guess will pay off remains a big question.
In a nutshell, an oil future is an agreement to buy or sell an amount of crude oil—typically in lots of 1,000 barrels—on a future date, usually ranging from one month to nine years.
Institutional investors, like hedge funds, mutual funds, and banks, are among the most active traders in this market. So are high net worth and other risk-tolerant investors, heavy consumers of oil and oil companies themselves.
Oil futures are volatile, to say the least. And speaking of volatility, it’s been quite the zig-zag week.
After peaking at $124 a barrel last week, heading into today’s trading, WTI domestic crude—at $104.10—was actually trading a penny higher than Monday’s opening of $104.09.
Oil on Monday closed down at $102.1, on Tuesday it closed down at $95.38 and on Wednesday it closed down at $94.92.
The market reversed yesterday, closing up at $103.25. And as of mid-morning today (Eastern time), futures are up at $103.66—roughly a wash for the week.
Unfortunately for the manipulators, most of their shorts assume lower prices and longer-term contracts. There’s a lot of uncertainty in those waits.
Will Sanctions Drive Others Away from the Dollar?
And Matt Phillips says the crushing sanctions imposed on Russia by the U.S. is showing the power of dollar, which may drive other countries to try to avoid using it.
He points to Saudi Arabia talking with China about accepting China’s yuan in exchange for oil. Of course, that's been an on-again, off-again discussion for awhile now.
But that kind of deal could signal that the dollar's universal status — already in retreat as a result of China's quick rise over the past decade or so — faces new challenges during this period geopolitical flux.
Currency experts, however, maintain that the dollar, which is the world's dominant currency in terms of pricing, payments and reserves, is in little danger from a Saudi/China oil partnership.
They view such a move as more symbolic than as a serious threat to the dollar's top-dog status.
Cornell economics professor and the author of "The Dollar Trap" Eswar Prasad observed, "Ultimately, as a reserve currency, you still need a very liquid currency with deep financial markets and strong institutions.”
Saudi Arabia has sold its oil exclusively since late 1974 after it struck a deal with the Nixon administration that included key economic and security components.
At the time, Saudi Arabia had just led a devastating oil embargo against the U.S., leading to long lines and skyrocketing prices at gas pumps
The 1974 agreement reset the relationship, deepening military and economic ties between the two countries.
But since a U.S. intelligence report found that Saudi leaders approved the brutal murder of Washington Post journalist and U.S. resident Jamal Khashoggi, relations between the countries have been dicey.
The dollar's relative strength as a fiat currency stems in large part from its tie to democratic ideals.
Despite widespread predictions of a falling dollar, American laws, courts and institutions exert a powerful pull that authoritarian economies—like Saudi Arabia, China and Russia—have trouble competing with…at least for the time being.
It’s been a rocky week for gold and silver as paper investors have taken some recent profits. Since falling from last Friday’s close of $1,988, gold is on the mend as we approach the first day of spring.
Gold is still up over 6% and silver is up over 9% so far this year. Don’t wait for gold and silver to surge to the next level; consider adding more to your portfolio now to lock into today’s prices.